First Community Bancshares, Inc. — FY2011 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended December 31, 2011, with comparisons primarily to FY2010. First Community is a regional financial holding company operating through community banking and insurance services, with wealth management activities. It reported $2.165 billion in assets and 55 banking locations across Virginia, West Virginia, North Carolina and Tennessee.
Financial performance and condition
| Metric | FY2011 / year-end | FY2010 / prior year-end |
|---|---|---|
| Net income available to common shareholders | $19.3 million; diluted EPS $1.07 | $21.8 million; diluted EPS $1.23 |
| Net interest income | $72.0 million | $73.9 million |
| Net interest margin (tax-equivalent) | 3.87% | 3.90% |
| Provision for loan losses | $9.0 million | $14.8 million |
| Noninterest income / expense | $35.5 million / $68.9 million | $40.5 million / $69.9 million |
| Total assets | $2.165 billion | $2.244 billion |
| Loans held for investment, before allowance | $1.396 billion | $1.386 billion |
| Deposits | $1.543 billion | $1.621 billion |
| Borrowings | $295.1 million | $332.1 million |
| Stockholders’ equity | $305.7 million | $269.9 million |
- Earnings and margins: Common earnings declined 11.5%. Tax-equivalent net interest income fell 2.9%, as lower asset yields and reduced average balances outweighed lower funding costs. Net interest margin slipped 3 basis points. The reported non-GAAP efficiency ratio improved to 59.23% from 60.03%; GAAP-based efficiency ratio increased to 64.07% from 61.16%.
- Cash flow: Operating activities provided $52.0 million; investing activities used $12.2 million; financing activities used $104.7 million. Cash and cash equivalents decreased $64.9 million to $47.3 million. These figures include deposit and borrowing flows and should be interpreted in the context of bank operations.
- Credit quality: Net charge-offs eased to $9.3 million from $12.6 million; the charge-off ratio fell to 0.67% from 0.90%. However, nonperforming assets rose to $31.0 million from $29.6 million, and nonaccrual loans increased to $24.5 million from $19.4 million. The allowance was $26.2 million, equal to 1.88% of loans and 104.5% of nonperforming loans.
- Liquidity and capital: Management reported total available liquidity of $468.9 million, including cash, unpledged securities and borrowing capacity. The Bank had $194.3 million of outstanding loan commitments and $355.8 million of time deposits scheduled to mature within one year. The Bank was classified as well capitalized; its total risk-based capital, Tier 1 risk-based capital and leverage ratios were 16.12%, 14.86% and 10.08%, respectively.
- Securities and equity: Available-for-sale securities were $482.4 million, with $21.7 million in gross unrealized losses. The company recorded $2.3 million of credit-related securities impairment in earnings. Equity increased partly from an $18.9 million private placement of Series A preferred stock; the preferred shares carry a 6% noncumulative dividend and are convertible into common stock.
Material changes versus FY2010
- Common net income fell from $21.8 million to $19.3 million; return on average assets declined from 0.97% to 0.88%, and return on average common equity from 8.11% to 6.81%.
- Lower loan-loss provisioning supported results, but nonperforming assets increased. Commercial real estate represented approximately 39.9% of the loan portfolio; consumer real estate was also a substantial exposure.
- Deposits fell $77.5 million, mainly from time-deposit runoff, while noninterest-bearing deposits increased. Borrowings declined $36.9 million. Total assets declined $79.4 million.
- Net securities gains decreased to $5.3 million from $8.3 million. The company also recognized a $1.2 million insurance-segment goodwill impairment and $471,000 in FHLB prepayment fees.
Outlook, risks and unusual items
- No quantified earnings or financial guidance is provided. Management describes growth through acquisitions and office expansion as part of its strategy, while emphasizing relationship banking, cost efficiency and disciplined underwriting.
- Management cites weak regional real estate and economic conditions, borrower stress, commercial and real-estate loan concentrations, interest-rate sensitivity, competition, regulatory change, deposit insurance costs, and dependence on Bank dividends as important risks. The allowance and collateral valuations rely on estimates and may not cover future losses.
- Interest-rate simulations estimated a 13.0% increase in projected net interest income under an immediate, sustained 300-basis-point rise and a 1.2% decrease under a 100-basis-point fall. These are model scenarios, not forecasts; management notes material assumptions and limitations.
- Legal proceedings are described as arising in the normal course of business; management and counsel did not expect their resolution to have a material adverse effect. The auditor gave unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.
- On March 1, 2012, after year-end, the company agreed to acquire Peoples Bank of Virginia. Consideration is $6.08 in cash and 1.07 First Community common shares per Peoples share; closing remains subject to regulatory and shareholder approvals.
Important facts for investors to verify
- Whether the increase in nonaccrual loans and nonperforming assets continues, particularly in owner-occupied residential and non-farm, non-residential lending, and whether collateral values support recorded reserves.
- How deposit runoff, upcoming certificate maturities, loan commitments and borrowing capacity affect liquidity and funding costs.
- Whether net interest income and margin can stabilize amid low rates, asset repricing and the company’s rate-sensitive balance sheet.
- The quality and valuation of the available-for-sale portfolio, including the Alt-A mortgage-backed security impairment and unrealized losses.
- The terms, regulatory approvals, financing and expected effects of the Peoples Bank of Virginia merger, as well as potential dilution from preferred-stock conversion.